bloomberg on gas price uptick

Natural Gas Surges 56% From Seven-Year Low, May Keep Climbing
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By Reg Curren

Sept. 17 (Bloomberg) -- Natural gas futures surged yesterday and may add to a 56 percent gain since Sept. 4, fueled by speculation that an economic recovery will revive demand. Implied volatility reached a high for the year.

“Volatility often signals a long-term price reversal,” said Chris Jarvis, president of Caprock Risk Management LLC, based in Hampton Falls, New Hampshire. “An increase in volatility means the one-sided trade on the short side is starting to be challenged. Now people are trying to move the price higher and bottom fishers are coming in as a value play.”

Gas has risen from $2.409 per million British thermal units, the lowest level since March 2002, after a series of positive economic reports. Industrial output in the U.S. rose more than forecast in August, signaling manufacturing is helping end the recession.

Natural gas for October delivery jumped 44 cents, or 13 percent, to settle yesterday at $3.76 per million British thermal units on the New York Mercantile Exchange. It climbed as high as $3.797.

Implied volatility for October natural gas, a measure of how the options market perceives future price movements, increased to 111.64 on Sept. 15, the highest level this year, according to data released yesterday by the New York Mercantile Exchange. A high level of implied volatility indicates that traders may anticipate more big moves.

Speculative short positions, or bets gas prices will fall, outnumbered long positions by 168,629 contracts in New York in the week ended Sept. 8, according to the Washington-based Commodity Futures Trading Commission. The number of net-short positions dropped in each of the past two weeks.

Closing Positions

The rapid move up by gas forced some speculators to close their short positions, said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

“This is demonstrating how vulnerable natural gas is to pressure on the shorts when the market starts to turn,” he said.

Gas has been the worst performing commodity this year, declining 33 percent, compared with increases of 62 percent for crude oil and 83 percent for gasoline. Thirty-day historical volatility for gas futures yesterday was the highest since November 2006, according to data compiled by Bloomberg.

“Natural gas has lagged the entire commodity move,” said Brad Florer, a trader at Kottke Associates Inc., a commodity futures broker in Louisville, Kentucky. “It was trading in the $2s so people looking for commodity exposure may be giving it a shot and that may have been part of the starting point.”

Industrial Use

A rebound in the economy would lift industrial use of commodities, including gas, which accounts for about 29 percent of U.S. consumption.

Output at factories, mines and utilities climbed 0.8 percent last month, according to a report from the Federal Reserve yesterday in Washington. Economists forecast industrial production would rise 0.6 percent, according to the median of 75 projections in a Bloomberg News survey.

“Gas is now getting more credit for some demand increase,” said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston. “The manufacturing side is starting to stabilize.”

Prices fell in the first week of this month as stockpiles ballooned and consumption dropped. Gas inventories are 17 percent above the five-year average for this time of year and the Energy Department forecast supplies to exceed the record of 3.545 trillion cubic feet reached on Nov. 2, 2007.

Growing Supplies

Supplies may have gained 80 billion cubic feet last week, based on the median of 18 analyst estimates compiled by Bloomberg. The average gain for the week over the past five years is 82 billion, according to the department, which is scheduled to release its weekly report at 10:30 a.m. today.

“People may be worried about the storage number and that maybe we’ll get the same thing as with crude oil supplies” which fell more than forecast, said Michael Rose, director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida.

A lower injection of gas into storage may signal that cuts to exploration over the past year are starting to reduce supplies. Producers have cut the number of gas rigs working in the U.S. by 56 percent in the past year.

To contact the reporter on this story: Reg Curren in Calgary at [email protected].